Accounting for Home Office, Branch and Agency Transactions

Theories

1. Excess freight on inter-branch transfers of merchandise is

a. Not recognized
b. Charged as expense in the home office books
c. Recorded as freight-in in the books of the recipient branch
d. Charged as expense in the books of the recipient branch

2. Freight savings on inter-branch transfers of merchandise is

a. Not recognized
b. Recognized as gain in the home office books
c. Recognized as a reduction to the cost of shipments
d. Recognized as gain in the transferring branch’s books

3. When the shipments to branch are billed at other than cost, the individual profit of
the branch is not equal to its true profit. The difference pertains to the
a. Realized mark-up c. Total mark-up
b. Unrealized mark-up d. Errors committed

4. After year-end adjustments but before elimination entries, the balance in the
“allowance for mark-up on shipments to branch”
a. Is equal to zero c. Represents the realized mark-up
b. Represents the unrealized mark-up d. Represents profit

5. The freight on shipments to branch paid by the branch is recorded by the home office
as
a. Credit to freight-in c. Debit to freight-in
b. Credit to investment account d. Not recorded

6. A cash remittance from the branch to the home office is recorded by the home office
as
a. Credit to investment account c. Debit to home office
b. Debit to investment account d. Credit to cash

7. Shipments to branch may be billed at other than cost. When billing prices are above
cost, the unrealized mark-up is initially recorded by the home office
a. As a credit to investment in branch account
b. As an addition to the cost of “shipments to branch”
c. In an “allowance” account
d. B and C

8. Transactions between branches are recorded by the transacting branches

a. A branch is not permitted to transact with another branch
b. By debiting or crediting their own investment in branch accounts
 c. As if each of them is transacting with the home office
d. A and B

9. Transactions between a home office and its branch are accounted for in reciprocal
accounts. The reciprocal account maintained in the branch books is called
a. Investment in branch c. Home office
b. Advances from home office d. Any of these

Answers:

1. b 4. b 7. c

2. a 5. d 8. c

3. a 6. a 9. a

Problems:

1. The home office ships merchandise to its branch at 20 percent above cost. The
branch’s books show a beginning inventory of home office merchandise of 30,000 and
shipments from home office of 180,000. What is the balance before closing in the
Allowance for Overvaluation of Branch Inventory account?
a. P35,000
b. P36,000
c. P42,000
d. P52,500

Solution:

A.

Goods available for sale:

At billed price (P30,000 + P180,000) P210,000

At cost (P210,000 / 120%) 175,000

Balance of Allowance for Overvaluation account before adjustment P 35,000

The following balances are from the books of the Bicol Co. and its Naga City branch
as of December 31, 2018:
Debit Credit
Sales P270,000
Shipments from Home Office P151,200
Inventory, January 1 28,350
Expenses 90,000
 The Naga City branch purchases all of its merchandise from the home office. Its
December 31 inventory was P25,200. The home office bills the branch at 40% above
its cost.
2. Before closing, what is the balance of the Shipment to Branch Account on the Home
Office Books?
a. P128,250
b. P108,000
c. P 99,900
d. P 90,720
3. What is the branch profit as far as the home office is concern?
a. P28,800
b. P31,950
c. P69,750
d. P76,950

Solution:

B.

(P151,200 / 140%)

C.

Sales P270,000

Cost of goods sold

Shipments from home office (P151,200/140%) P108,000

Inventory, 1/1 (P28,350 / 140%) 20,250

Inventory, 12/31 (P25,200 / 140%) ( 18,000) 110,250

Gross profit P159,750

Expenses 90,000

Branch profit as far as the home office is concerned P 69,750

The Ventures Corporation decided to open a branch store in Manila. Shipments of

merchandise to the branch totalled P108,000 which included a 20% mark-up on cost. All
accounting records are to be kept at the home office.

The branch submitted the following report summarizing its operations for the period ended
December 31, 2018.

Sales on account P148,000

Sales on cash basis 44,000

Collections of accounts 120,000

 Expenses paid 76,000

Expenses unpaid 24,000

Purchase of merchandise for cash 52,000

Inventory on hand, December 31 (80% from home office) 60,000

Remittances to home office 110,000

4. How much is the ending inventory at cost?

a. P40,000
b. P50,000
c. P52,000
d. P51,000
5. What is the branch comprehensive income under the generally accepted accounting
principles?
a. P1,600
b. P2,000
c. P8,000
d. P5,000

Solution:

C.

Acquired from home office [(P60,000 x 80%) ÷ 120%] P 40,000

Acquired from outsiders (P60,000 x 20%) 12,000

Branch inventory, 12/31 – at cost P 52,000

B.

Sales (P148,000 + P44,000) P192,000

Cost of sales – at cost to home office:

Shipment from home office (P108,000 / 120%) P90,000

Purchases 52,000

Inventory, 12/31 (no. 19 above) (52,000) 90,000

Gross profit P102,000

Expenses (P76,000 + P24,000) 100,000

Branch net income (actual) P 2,000

Consolidated Financial Statements

Theories

1. Which of the following methods of allocating the gain or loss on an intercompany bond
retirement is the soundest conceptually?
a. The gain (loss) is allocated to the company that issued the bonds.
b. The gain (loss) is allocated to the company that purchased the bonds.
c. The gain (loss) is allocated to the parent company.
d. The gain (loss) is allocated between the purchasing and issuing companies.

2. The constructive gain or loss on an intercompany bond retirement is recognized in the

consolidated income statement _________ the recognition of the gain or loss on the
individual companies' books.
a. After c. At the same time
b. Before d. Before or after

3. The constructive gain or loss to the purchasing company is the difference between the
a. Book value of the bonds and their par value.
b. Book value of the bonds and their purchase price.
c. Cost of the bonds and their par value.
d. Cost of the bonds and their purchase price.

4. The workpaper eliminating entry for a stock dividend declared by the subsidiary
includes a
a. Debit to Stock Dividends Declared - S Co.
b. Debit to Noncontrolling interest.
c. Credit to Stock Dividends Declared - S Co.
d. Debit to Dividend Income.

5. The parent company records the receipt of shares from a subsidiary's stock dividend
as
a. Dividend income.
b. A reduction of the investment account
c. An increase in the investment account.
d. None of these.

6. If the book value of preferred stock is greater than its implied value, the difference is
accounted for as an increase in
a. Consolidated retained earnings. c. Other contributed capital.
b. Consolidated net income. d. Investment in subsidiary preferred
stock

7. If a subsidiary has both common and preferred stock outstanding, a parent must own
a controlling interest in
a. Both the subsidiary's common and preferred stock to justify consolidation.
 b. The subsidiary's common stock to justify consolidation.
c. The subsidiary's common stock and at least 20% of the subsidiary's preferred stock
to justify consolidation.
d. The subsidiary's common stock and more than 50% of the subsidiary's preferred
stock to justify consolidation.

8. From a consolidated entity point of view, the constructive gain or loss on the open
market purchase of a parent company's bonds by a subsidiary company is
a. Considered realized at the date of the open market purchase.
b. Realized in future periods through discount and premium amortization on the
books of the individual companies.
c. Realized only to the extent of the parent company's interest in the subsidiary.
d. Deferred and recognized in the consolidated income statement when the bonds are
retired.

9. Constructive gains and losses from intercompany bond transactions are:

a. Treated as extraordinary items on the consolidated income statement
b. Included as other revenues and expenses on the consolidated income statement.
c. Excluded from the consolidated income statement until realized.
d. Eliminated from the consolidated income statement.

Answers:

1. d 4. c 7. b

2. b 5. d 8. a

3. c 6. c 9. b

Problems

1. Entity Subsidiary has 40% of its share publicly traded on an exchange. Entity Parent
purchases the 60% non-publicly traded shares in one transaction, paying P6,300,000.
Based on the trading price of the shares of the Entity Subsidiary at the date of gaining
control a value of P4,000,000 assigned to the 40% non-controlling interest (or fair
value of non-controlling interest), indicating that Entity Subsidiary has paid a control
premium of P300,000. The fair value of Entity Subsidiary’s identifiable net assets is
P7,000,000 and a carrying value of P5,000,000.

Goodwill arising on consolidation is to be valued on the proportionate basis or “Partial”

Goodwill:

a. P1,200,000
b. P2,100,000
c. P3,300,000
d. P4,120,000
 2. Using the same information in No. 1, the amount of non-controlling interest arising
on consolidation is to be valued on the proportionate basis or “Partial” Goodwill:
a. P2,000,000
b. P2,800,000
c. P4,000,000
d. P4,120,000
3. Using the same information in No. 1, the amount of goodwill arising on consolidation
is to be valued on the full (fair value) basis or “Full/Gross-up” Goodwill:
a. P1,200,000
b. P2,100,000
c. P3,300,000
d. P4,120,000
4. Using the same information in No. 1, the amount of non-controlling interest arising
on consolidation is to be valued on the full (fair value) basis or “Full/Gross-up”
Goodwill:
a. P2,000,000
b. P2,800,000
c. P4,000,000
d. P4,120,000

Solutions:

1. B.
Fair value of Subsidiary:
Fair value of consideration transferred: Cash P6,300,000
Less: Book value of Net Assets (Stockholder’s
Equity – Subsidiary): P5,000,000 x 60% 3,000,000
Allocated Excess P3,300,000
Less: Over/under valuation of Assets and
Liabilities (P7,000,000 – P5,000,000) x 60% 1,200,000
Goodwill Partial P2,100,000

2. B.
Book value of Stockholder’s Equity of Subsidiary P5,000,000
Add: Adjustments to reflect fair value
(P7,000,000 – P5,000,000) 2,000,000
Fair value of Stockholder’s Equity of Subsidiary P7,000,000
Multiplies by: Non-controlling Interest % 40%
Non-controlling Interest P2,800,000

3. C.

(60%) Fair value of consideration given P 6,300,000

(40%) Fair value of non-controlling interest (given) 4,000,000

(100%) Fair value of Subsidiary P10,300,000

 Less: Book value of Net Assets (Stockholder’s

Equity of Subsidiary) 5,000,000

Allocated Excess P 5,300,000

Less: Over/Undervaluation of Assets and

Liabilities (P7,000,000 – P5,000,000) 2,000,000

Goodwill (Full/Gross-up) P 3,300,000

4. C.
Book value of Stockholder’s Equity of Subsidiary P5,000,000
Add: Adjustments to reflect fair value
(P7,000,000 – P5,000,000) 2,000,000
Fair value of Stockholder’s Equity of Subsidiary P7,000,000
Multiplies by: Non-controlling Interest % 40%
Non-controlling Interest (partial) P2,800,000
Add: Non-controlling interest in Full Goodwill
(P3,300,000 – P2,100,000 partial goodwill) 1,200,000*
Non-controlling Interest (full) P4,000,000

*P3,300,000 x 40% to determine non-controlling interest in full goodwill is not

doable since the fair value of non-controlling interest in the acquiree (or
subsidiary) is given.

5. Beta Company acquired 100 percent of the voting common shares of Standard Video
Corporation, its better rival, by issuing bonds with a par value and fair value of
P150,000. Immediately prior to the acquisition, Beta reported total assets of P500,000,
liabilities of P280,000, and stockholder’s equity of P220,000. At that date, Standard
Video reported total assets of P400,000, liabilities of P250,000, and stockholder’s
equity of P150,000. Included in Standard’s liabilities was an account payable to Beta
in the amount of P20,000, which Beta included in its accounts receivable.
Based on the preceding information: (1) what amount of total assets did Beta report
in its balance sheet immediately after the acquisition; (2) what amount of assets was
reported in the consolidated balance sheet immediately after the acquisition?
a. (1) P650,000; (2) P650,000
b. (1) P650,000; (2) P880,000
c. (1) P880,000; (2) P650,000
d. (1) P880,000; (2) P880,000

Solutions:
B.

(1) Beta’s Balance Sheet:

Total assets of Beta Company before issuance of shares P500,000

Add: Investment in Subsidiary (at fair value) 150,000

Total assets in the balance sheet of Beta Company P650,000

(2) Consolidated Balance Sheet:

Beta’s (parent) assets (refer to (1)) P 650,000

Standard Video’s (subsidiary) assets 400,000

Total assets before eliminations P1,050,000

Less: Eliminations

Investment in Subsidiary 150,000

Accounts receivable from Standard Video 20,000

Consolidated Total Assets P 880,000

Not-for-Profit Organization

Theories

1. Special entities are not-for-profit organizations that are

a. Government owned c. Publicly owned
b. Privately owned d. Either government owned or
Privately owned

2. For a university, the receipt of assets for operating activities that have external
restrictions as to the purposes for which they can be used is recorded by crediting
a. Fund Balance-Restricted c. Deferred Revenue
b. Contribution Revenue d. Net Assets Released

3. Which basis of accounting should a voluntary health and welfare organization use?
a. Cash basis for all funds c. Accrual basis for all funds
b. Modified accrual basis for all funds d. Accrual basis for some funds and
modified accrual basis for other funds

4. Which of the following groups of not-for-profit entities must use fund accounting to
be in conformity with GAAP?
Governmental Nongovernmental
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answers:

1. d

2. b

3. c

4. b

Problems:

1. Clara Hospital, a private not-for-profit hospital, earned P250,000 of gift shop

revenues and spent on research during the year ended, December 31, 2018. The
P50,000 spent on research was part of a P75,000 contribution received during
December of 2017 from a donor who stipulated that the donation be used for medical
research. Assume none of the gift shop revenues were spent in 2018. For the year
 ended, December 31, 2018, what was the increase in unrestricted net assets from the
events occurring during 2018?
a. P300,000
b. P200,000
c. P250,000
d. P275,000

Solution:

C.

The P250,000 gift shop revenue is unrestricted revenue because the governing board
has control of this revenue. Thus:

Unrestricted net assets P250,000

Increase in unrestricted net assets due to reclassification 50,000

P300,000

Less: Expenses incurred 50,000

P250,000

2. The following expenditures were made by Green Community, a society for the
protection of the environment.

Printing of the annual report P12,000

Unsolicited merchandise sent to encourage contributions 25,000

Cost of an audit performed by a CPA firm 3,000

What amount should be classified as fund-raising costs in the society’s activity

statement?

a. P37,000
b. P28,000
c. P25,000
d. P 0

Solution:

C.

The cost of printing the annual report and the cost of an audit performed by a CPA
firm would be other general and administrative expenses. Since the merchandise is
being sent to encourage contributions, it would be a cost of fund-raising and reported
as such in the activity statement.
 3. The League, a not-for-profit organization, received the following pledges:
Unrestricted P200,000
Restricted for capital additions 150,000

All pledges are legally enforceable; however, the League’s experience indicates that
10% of all pledges prove to be uncollectible. What amount should the League report
as pledges receivable, net of any required allowance account?

a. P135,000
b. P180,000
c. P315,000
d. P350,000

Solution:

C.

Pledges are recognized net of uncollectible amounts. Since total pledges are
P350,000, but 10% is expected to be uncollectible, pledges receivable will be recorded
in the amount of P350,000, but an allowance for uncollectibility of 10% or P35,000
will be established. The net amount of P315,000 will be reported as pledges
receivable.

Other Special Topics

Theories

1. Which of the following accounting practices has been outlawed by PFRS 4?

a. Shadow Accounting
b. Catastrophe Accounting
c. A test for the adequacy of recognized insurance liabilities
d. An impairment test for reinsurance assets

2. Which of the following types of insurance contract would probably not be covered by
PFRS 4?
a. Motor insurance c. Medical insurance
b. Life insurance d. Pension plan

3. PFRS 4 says that insurance contracts should:

a. Be covered by existing accounting policies during phase one
b. Comply with the PFRS Framework document
c. Comply with all existing PFRS
d. Be covered by PAS 32 and PAS 39 only

4. PFRS 4 was introduced principally for what reason?

 a. To ensure that insurance companies could comply with International Financial
Reporting Standards by 2005.
b. To completely overhaul insurance accounting.
c. As a response to recent scandals within the insurance industry.
d. Because of pressure from the financial services authorities in several countries.

5. Which International Financial Reporting Standard will apply to those contracts that
principally transfer financial risk, such as credit derivative?
a. PAS 32 c. PAS 39
b. PAS 18 d. PAS 4

6. Insurers can recognize an intangible asset that is the difference between the fair
value and book value of insurance liabilities taken on in business combination. This
asset should be accounted for using.
a. PAS 38 Intangible Assets
b. PFRS 4 Insurance Contracts only
c. PAS 16 Property, Plant and Equipment
d. Such an asset should not be accounted for until phase two of the insurance
contarct

Answers:

1. b 4. a

2. d 5. c

3. a 6. b

Problem

1. Entity A writes a single policy for a P100,000 premium and expects claims to be
made of P60,000 in 2018. At the time of writing the policy, there are commission
costs of P20,000. Assume a discount rate of 3% risk-free. The entity says that if a
provision for risk and uncertainty were to be made, it would amount to P25,000 and
that this risk would expire evenly over years 2016, 2017, and 2018. Under existing
policies, the entity would spread the premiums, the claims expense, and the
commissioning costs over the first two years of the policy. Investment returns in
year 2015 and 2016 are P2,000 and P4,000 respectively.

What is the profit in year 2015 and 2016, using the matching and deferral approach
in yeras 2015 and 2016?
2015 2016
a. P12,000 P14,000
b. P10,000 P10,000
c. P26,000 P 0
d. P 0 P26,000
Solution:

A.

2015: P50,000 – P30,000 – P10,000 + P2,000 = P12,000

2016: P50,000 – P30,000 – P10,000 + P4,000 = P14,000

Cost Accounting

Job Order Costing

Theories

1. Which of the following organizations would be most likely to use a job order costing
system?
a. The loan department of a bank
b. The check cleaning department of a bank
c. A manufacturer of processed cheese food
d. A manufacturer of video cassette tapes

2. When job order costing is used, the primary focal point of cost accumulation is the
a. Department c. Item
b. Supervisor d. Job

3. Which of the following could not be used in job order costing?

a. Standards
b. An average cost per unit for all jobs
c. Normal costing
d. Overhead allocation based on the job’s direct labor hours

Answers:

1. a

2. d

3. b

Problems

Alpha Co. uses a job order costing system. At the beginning of January, the company had
two jobs in process with the following costs:
 Direct Material Direct Labor Overhead

Job#456 P3,400 P510 P255

Job#461 1,100 289 ?

Alpha pays its workers P8.50 per hour and applies overhead on a direct labor hour basis.

1. What is the overhead application rate per direct labor hour?

a. P 0.50
b. P 2.00
c. P 4.25
d. P30.00

Solution:

C.

Direct labor hours: P510 / P8.50 = 60 hrs

Overhead application rate:P255 / 60 hrs = P4.25

Products at Redd Manufacturing are sent through two production department: Fabricating
and Finishing. Overhead is applied to products in the Fabricating Deaprtment based on 150
percent of direct labor cost and P18 per machine hour in Finishing. The following
information is available about Job #297:

Fabricating Finishing

Direct material P1,590 P580

Direct labor cost ? 48

Direct labor hours 22 6

Machine hours 5 15

Overhead applied 429 ?

2. What is the total cost of Job #297?

a. P2,647
b. P3,005
c. P3,093
d. P3,203

Solution:

D.

Direct labor Fabricating P429 / 1.50 = P286

Applied overhead Finishing 15 hrs x P18 = P270

 Fabricating Finishing

Direct material P1,590 P580

Direct labor cost 286 48

Overhead applied 429 270

Total Costs P2,305 P898 P3,203

Process Costing

Theories

1. Which cost accumulation procedure is most applicable in continuous mass-

production manufacturing environments?
a. Standard c. Process
b. Actual d. Job order

2. Equivalent units of production are equal to the

a. Units completes by a production department in the period.
b. Number of units worked on during the period by a production department.
c. Number of whole units that could have been completed if all work of the period
had been used to produce whole units.
d. Identifiable units existing at the end of the period in a production department.

3. The method of neglect handles spoilage that is

a. Discrete and abnormal c. Continuous and abnormal
b. Discrete and normal d. Continuous and normal

Answers:

1. c

2. c

3. d

Problems

1. Kerry Company makes small metal containers. The company began December with
250 containers in process that were 30 percent complete as to material and 40
percent complete as to conversion costs. During the month, 5,000 containers were
started. At month end, 1,700 containers were still in process (45 percent complete as
to material and 80 percent complete as to conversion costs). Using the weighted
average method, what are the equivalent units for conversion costs?
a. 3,450
b. 4,560
 c. 4,610
d. 4,910

Solution:

D.

Beginning Work in Process 250 40% 100

+ Completion of Units in Process 250 60% 150

+ Units Started and Completed 3,300 100% 3,300

+ Ending Work in Process 1,700 80% 1,360

Equivalent Units of Production 4,910

2. Bush Company had beginning Work in Process Inventory of 5,000 units that were 40
percent complete as to conversion costs. X started and completed 42,000 units this
period and had Ending Work in Process Inventory of 12,000 units. How many units
were started this period?
a. 42,000
b. 47,000
c. 54,000
d. 59,000

Solution:

C.

Units Transferred Out 47,000

Ending Work in Process 12,000

Deduct: Beginning Work in Process 5,000

Units Started 54,000

Backflush/JIT Costing

Theories

1. In a JIT system, the quality of each product begins with

a. A company’s vendors
b. Employees
c. Inspection of finished goods inventory
d. A good product warranty

2. Reducing setup time is a major aspect of

a. All push inventory systems
b. The determination of safety stock quantities
 c. A JIT system
d. An EOQ system

3. JIT is philosophy concerned with

a. When to do something
b. How to do something
c. Where to do something
d. How much of something should be done

Answers:

1. a

2. c

3. a

Activity Based Costing System

1. In this costing system, the various activities performed in the business segment or in
the entire organization are identified, costs are collected on the basis of the
underlying nature and extent of such activities, and then assigned to the products or
services based on consumption of such activities by the products or services.
a. Operation costing system c. Job-order costing system
b. Activity-based costing system d. Process costing system

2. Which of the following statements is not correct?

a. ABC tends to increase the number of cost pools and cost divers used.
b. ABC’s philosophy is to accumulate heterogeneous cost pools.
c. In ABC system, homogenizing cost pools minimizes broad averaging of costs that
have different drivers.
d. Design of an ABC system starts with process value analysis, a comprehensive
understanding of how an organization generates its output.

3. ABC differs from traditional product costing because it uses multiple allocation
bases and therefore, allocate costs (such as overhead costs) more accurately. This
normally results in
a. Equalizing setup costs for all product lines.
 b. Lower setup costs being charged to low volume products.
c. Decreased unit costs for low-volume products than is reported by traditional
product costing systems.
d. Substantially greater unit costs for low-volume products than is reported by
traditional product costing systems.

Answers:

1. b

2. b

3. d

Problems

The cost accountant of L. Rosales, Inc. is considering to use the ABC system in determining
the cost of its products.

At present, the company uses the traditional costing system wherein factory overhead costs
are allocated based on direct labor hours. The cost accountant believes that the present
system may be providing misleading cost information, hence, the plan to change to the ABC
system.

For the coming period, the company is planning to use 5,000 direct labor hours, and its total
budgeted factory overhead amounts to P90,000, broken down as follows:

Budgeted Budgeted
Activity Cost Driver Activity Cost

1. Setup costs Number of setups 40 P20,000

2. Production monitoring Number of batches 20 40,000
3. Quality control Number of inspections 1,000 30,000
Total overhead cost P90,000

Projected data for one of the company’s products, Product X, for the coming period are as
follows:

Production and sales 1,000 units

Direct labor hours 2,000 hours

Units per batch 500

Number of setups 4

Number of inspections 200

Direct materials cost P10 per unit

Direct labor rate P20 per hour

 1. If the company will use the traditional full cost system, the cost per unit of Product
X for the coming period will be
a. P36
b. P50
c. P86
d. P68
2. If the company will use the ABC system, the cost per unit of Product X for the
coming year will be
a. P62
b. P50
c. P86
d. P12

Solution:

C.

Direct material P10

Direct labor (2 hours per unit x P20 per hour) 40

Factory Overhead (P18 per hour x 2 hours per unit)* 36

Cost per unit of Product X P86

2,000 hours
∗ Labor time per unit = = 2 hours per unit
1,000 units
P90,000
∗ Overhead rate per hour = = P18 per hour
5,000 hours

A.

Direct materials P10

Direct labor (2 hours per unit x P20 per hour) 40

Factory overhead* 12

Cost per unit of Product X – ABC system P62

Joint and By-Produts

Theories

1. If the company obtains two salable products from the refining of one ore, the refining
process should be accounted for as a(n)
 a. Mixed cost process c. Extractive process
b. Joint process d. Reduction process

2. Which of the following statements is true regarding by-products or scrap?

a. Process costing is the only method that should result in by-products or scrap.
b. Job order costing systems will never have by-products or scrap.
c. Job order costing systems may have instances where by-products or scrap result
from the production process.
d. Process costing will never have by-products or scrap from the production process.

3. The method of pricing by-products or scrap where no value is assigned to these items
until they are sold is known as the
a. Net realizable value at split-off point method
b. Sales value at split-off method
c. Realized value approach
d. Approximated net realizable value at split-off method

Answers:

1. b

2. c

3. c

Problems

Ratcliff Company produces two products from a joint process: X and Z. Joint processing
costs for this production cycle are P8,000.

Disposal

Sales price cost per Further Final sale

per yard at yard at processing price per

Yards split-off split-off per yard yard

X 1,500 P6.00 P3.50 P1.00 P 7.50

Z 2,200 9.00 5.00 3.00 11.25

If X and Z are processed further, no disposal costs will be incurred or such costs will be
borne by the buyer.

1. Using a physical measure, what amount of joint processing cost is allocated to X?

a. P4,000
b. P4,757
c. P5,500
d. P3,243
2. Using a physical measure, what amount of joint processing cost is allocated to Z?
 a. P4,000
b. P4,757
c. P5,500
d. P3,243
3. Using sales value at split-off, what amount of joint processing cost is allocated to X?
a. P5,500
b. P4,000
c. P2,500
d. P3,243
4. Using sales value at split-off, what amount of joint processing cost is allocated to Z?
a. P5,500
b. P4,000
c. P2,500
d. P3,243
5. Using net realizable value at split-off, what amount of joint processing cost is
allocated to X?
a. P4,000
b. P5,610
c. P2,390
d. P5,500

Solutions:

D.

1,500 / 3,700 x P8,000 = P3,243

B.

2,200 / 3,700 x P8,000 = P4,757

C.

Sales price

Yards at Split-off Total

X 1,500 P6.00 P 9,000

Z 2,200 9.00 19,800

P28,800

(P9,000 / P28,800) x P8,000 = P2,500

A.

(P19,800 / P28,800) x P8,000 = P5,500

C.

Sales price Disposal NRV/

 Yards at Split-off Cost/Yard Split-off Total NRV

X 1,500 P6.00 P3.50 P2.50 P 3,750

Z 2,200 9.00 5.00 4.00 P 8,800

P12,550

(P3,750 / P12,550) x P8,000 = P2,390

Standard Costing

Theories

1. Standard costing systems may be used with

a. Just-in-time systems c. Computer-integrated manufacturing systems
b. Total quality management d. All of the above

2. A standard cost is an estimate of what a cost should be under normal operating

conditions. In establishing standard costs, the following organizational personnel
may be involved, except
a. Top management c. Quality control personnel
b. Budgetary accountants d. Industrial engineers

3. The difference between the actual time used and the amount of time that should
have been used for actual production, multiplied by the standard labor rate per time
is called
a. Efficiency variance c. Spending variance
b. Price variance d. Rate variance

Answers:

1. d
2. a
3. a

Problems

During July, a company’s direct materials costs for the production of Product X were as
follows:

Standard unit price P12.50

Standard quantity allowed for actual production 6,300 units

 Actual unit purchase price P13

Quantity purchased and used for actual production 6,900 units

The total materials cost variance is

a. P89,700 unfavorable
b. P78,750 favorable
c. P10,950 favorable
d. P10,950 unfavorable

The materials efficiency or usage variance is

a. P10,950 unfavorable
b. P7,500 unfavorable
c. P3,450 unfavorable
d. P7,500 favorable

The materials spending variance or price variance is

a. P3,450 unfavorable
b. P3,450 favorable
c. P7,500 unfavorable
d. P10,950 unfavorable

Solution:

D.

Quantity Price Total

Actual 6,900 P13.00 P89,700

Standard 6,300 12.50 78,750

Variance 600 U P 0.50 U P10,950 U

B.

Efficiency or Usage Variance

= Difference in Quantity x Standard Price

= 600 U x P12.50

= P7,500 unfavorable

A.

Spending or Price Variance

= Difference in Price x Actual Quantity

= P0.50 U x 6,900
 = P3,450 unfavorable

Service Cost Allocation

Problems

The managers of Rochester Manufacturing are discussing ways to allocate the cost of
service deparments such as Quality Control and Maintenance to the production
departments. To aid them in this discussion the controller has provided the following
information:

Quality

Control Maintenance Machining Assembly Total

Budgeted overhead costs

before allocation P350,000 P200,000 P400,000 P300,000 P1,250,000

Budgeted machine hours - - 50,000 - 50,000

Budgeted direct labor hours - - - 25,000 25,000

Budgeted hours of service:

Quality control - 7,000 21,000 7,000 35,000

Maintenance 10,000 - 18,000 12,000 40,000

1. If Rochester Manufacturing uses the direct method of allocating service department

costs, the total service costs allocated to the assembly department would be
a. P 80,000
b. P 87,500
c. P120,000
d. P167,500

2. Using the direct method, the total amount of overhead allocated to each machine
hour at Rochester Manufacturing would be
a. P 2.40
b. P 5.25
c. P 8.00
d. P15.65

3. If Rochester Manufacturing uses the step-down method of allocating service costs

beginning with quality control, the maintenance costs allocated to the Assembly
Department would be
a. P 70,000
b. P108,000
c. P162,000
d. P200,000
 4. If Rochester Manufacturing uses the reciprocal method of allocating service costs,
the total amount of quality control costs (rounded to the nearest peso) to be allocated
to the other departments would be
a. P284,211
b. P336,842
c. P350,000
d. P421,053

5. If Rochester Manufacturing decides not to allocate service costs to the production

departments, the overhead allocated to each direct labor hour in the Assembly
Department would be
a. P 3.20
b. P 3.50
c. P12.00
d. P16.00

Solutions:

D.

Under the direct method, service department costs are allocated directly to the
production departments, with no allocation to other service departments.

Quality control costs: P350,000 x [7,000 / (7,000 + 21,000)] P 87,500

Maintenance: P200,000 x [12,000 / (18,000 + 12,000)] 80,000

P167,500

D.

Machining

Direct costs P400,000

Allocated overhead:

QC costs: P350,000 x [21,000 / (7,000 + 21,000)] 262,500

Maintenance: P200,000 x [18,000 / (18,000 + 12,000)] 120,000

Total costs P782,500

Divided by: Budgeted machine hours 50,000

Costs per machine hour P 15.65

B.

The step-down method allocate service costs to both service and production
departments but does not permit mutual allocations. Accordingly, Quality Control
will receive no allocation of maintenance costs.
 Service Operating

Quality

Control Maintenance Machining Assembly

Direct costs P350,000 P200,000

Quality Control’s costs:

(7,000 : 21,000 : 7,000 =

20% : 60% : 20%) (350,000) 70,000 P210,000 P 70,000

P270,000

Maintenance costs:

(18,000 : 12,000) 270,000 162,000 108,000

P372,000 P178,000

D.

The reciprocal method permits mutual allocations of service costs among service
departments. For this purpose, a system of simultaneous equations is necessary. The
total costs for the Quality Control Department consist of P350,000 plus 25% ( 10,000
hours / 40,000 hours ) of maintenance costs. The total costs for the Maintenance
Department equal P200,000 plus 20% ( 7,000 hours / 35,000 hours ) of quality
control costs. These relationships can be expressed by the following equations:

Q = P350,000 + .25 M

M = P200,000 + .2Q

To solve for Q, the second equation can be substituted into the first as follows:

Q = P350,000 + .25 (P200,000 + .2Q)

Q = P350,000 + P50,000 + .05Q

.95Q = P400,000

Q = P421,053

C.

With no allocation of service department costs, the only overhead applicable to the
Assembly Department is the P300,000 budgeted for that department. Hence, the
overhead cost applied per direct labor hour will be P12 (P300,000 budgeted overhead
/ 25,000 hours).

Answer (a), (b), and (d) are incorrect because the overhead cost applied per direct
labor hour will be P12.